U.S. Stagflation or Inflation? Triggers for Stagflation

Hey there, economic explorers! You know, it's easy to get caught up in the daily headlines, but sometimes, you've got to step back and look at the bigger picture. We're living in a fascinating time, where global economies and political landscapes are constantly shifting, and understanding these dynamics can feel like trying to catch smoke. But don't worry, we're going to break it all down together, making sense of the complex forces shaping our world. Let's dive in and see what's really going on behind the scenes, shall we?

Is the Dollar's Reign Really Coming to an End? Unpacking the "Quiet Erosion"

Here's the thing, you might have heard whispers about the U.S. dollar losing its dominant position in the global economy, and from my experience, it's not as simple as it seems. While the dollar's hegemony isn't collapsing overnight, there's definitely a "quiet erosion" happening, as even the IMF noted in a paper . The dollar's share of foreign reserves held by central banks worldwide, a key indicator, has significantly declined from its peak of 73% in 1999 to around 57-60% recently . This historical high in 1999, interestingly, was largely driven by the fear among East Asian countries after the IMF crisis, prompting nations like China, Japan, and Korea to hold vast amounts of dollars .

What's really interesting is that while the dollar weakens, other currencies, including even the Korean won, have seen their global presence increase . This gradual shift is a continuous process . However, it’s crucial to understand that there isn't a viable replacement currency ready to instantly take the dollar's place . The euro, for example, faces instability due to Europe's political landscape and the rise of extreme right-wing movements that often advocate for the dissolution of the European Union . Furthermore, other currencies like the yuan haven't yet achieved the status of an international currency . So, while the dollar's influence is indeed decreasing, a complete and sudden overthrow of its hegemony isn't on the cards anytime soon; instead, we're looking at a gradual weakening over decades .

The U.S., on its part, is actively trying to prevent this erosion. One surprising insight is that the U.S. really dislikes the rising price of gold . Gold, especially after 2018 when its production growth stalled, can weaken the overall power of paper money when its price goes up . This leads to a strategic push for stablecoins, which are mostly dollar-based and don't threaten the dollar's status as reserve assets for central banks . Expanding the stablecoin market is seen as a way to strengthen dollar hegemony, preventing money from flowing into gold and acting as a "last resort" against the dollar's quiet erosion . This is a fascinating play, isn't it?

Stagflation on the Horizon? Are We Headed for Economic Turbulence?

Let's talk about something a bit more unsettling: the whispers of stagflation in the U.S. You know, that dreaded combination of high inflation and stagnant economic growth. The concerns are growing, especially after the U.S. employment figures for May and June were drastically revised downwards, from an initial estimate of around 140,000 new jobs to a mere 14,000 . That's a whopping one-tenth of the original number! While this might seem like a clear sign of recession, here's a counterintuitive insight: these figures mainly reflect new hires, and the decrease is partly due to aggressive immigration policies . Essentially, there are fewer new hires because fewer new people are entering the workforce, so the economy might not be as bad as the raw numbers suggest .

However, the real inflation storm might be brewing. I've found that tariffs play a significant role here. With various industries facing tariffs, like the 50% tariff on steel, their costs are increasing, and these costs are likely to be passed on to consumers as higher selling prices in the coming months . Reciprocal tariffs, which took effect in early August, will further push up prices, making inflation unstable in October and November . If this inflation continues into the first and second quarters of next year, the U.S. won't be able to cut interest rates significantly, even if the economy slows down . Releasing more money would only exacerbate inflation . This inability to act creates a real risk of a recession in the latter half of next year, precisely because interest rates can't be lowered .

What truly dictates whether we face a full-blown stagflation scenario, beyond these forecasts? It all boils down to oil prices . Energy prices are a huge component of the U.S. inflation index, and if they surge, overall prices will rise regardless of any recession . Just look at the inflationary period of the 1970s, where a sudden hike in oil prices led to stagflation . And here's another surprising fact: despite the buzz about electric vehicles, global oil consumption is actually increasing every day . Countries like India, China, and even in Africa are seeing their populations prosper and consume more oil than ever before . So, the stability of oil prices, whether they remain under $100 or exceed it, will be the most crucial factor in determining if stagflation hits us . Isn't that something to really think about?

The Geopolitics of Oil: A High-Stakes Game Between Trump and Bin Salman

Now, let's shift our gaze to the fascinating, high-stakes game playing out in the geopolitics of oil. You know, it's not just about supply and demand; there are deep political strategies at play. From my perspective, the relationship between U.S. policies and Saudi Arabian oil production is a chess match with global implications. President Trump's policies, despite his claims of wanting to increase crude oil production, could actually reduce U.S. output in the future . How? Well, tariffs on items like steel increase production costs for shale oil companies, and immigration policies make it difficult for these companies to hire workers for demanding outdoor jobs . This has caused the unit cost of producing shale oil to rise significantly, reaching $65 in core areas and $70 in the outskirts, with fears it could hit 75or75or$75 or $80 . This makes developing new oil fields extremely challenging in the U.S. .

This brings us to Crown Prince Mohammed bin Salman of Saudi Arabia. It's truly interesting how he's been increasing oil production when prices are just over $70, apparently to bring them down to around $65 . But don't be fooled into thinking this is to help Trump . Bin Salman has a hidden ambition: he actually wants oil prices to be at least $100 per barrel . Why? Saudi Arabia relies entirely on oil sales to fund its extensive welfare policies, from education abroad to cradle-to-grave social benefits . To avoid a fiscal deficit, their oil export price needs to be $95 per barrel . Moreover, to fund ambitious projects like Neom City, oil prices need to hit $120 .

So, what's his game? Bin Salman's strategy is to drive down shale oil prices now to bankrupt U.S. shale companies . If crude oil prices fall below $70 while U.S. production costs reach $75 due to tariffs and immigration policies, many shale companies will go out of business . Their facilities will become "cold stacks," stopping crude oil production indefinitely . Once U.S. shale production is sufficiently curtailed, the Crown Prince can thenraise oil prices back to $100 or even $120. This upcoming "showdown" between Bin Salman and Trump is, in essence, the "most important main event that will determine the global economy and order" . What do you make of that? It's a high-stakes play for sure!

Beyond Tariffs: How Nations are Reshaping the Global Trade Order

Finally, let's consider how nations are reacting to these protectionist winds and reshaping the global trade order. You know, tariffs aren't a new phenomenon. We've seen this before, particularly in the early 1930s during the Great Depression, when the Smoot-Hawley Act in the U.S. triggered a cascade of reciprocal tariffs from other countries . The result? A massive shrinkage of global trade and a plummeting worldwide economic growth rate, spreading the Great Depression across the globe . The lesson learned then was clear: everyone suffers when protectionist walls go up .

However, countries today are demonstrating more strategic responses. Instead of simply engaging in tit-for-tat tariff battles, many are proactively forming new Free Trade Agreements (FTAs) among themselves . This collective action aims to mitigate the impact of rising tariff barriers from powerful nations. The European Union, in particular, is playing a crucial role, engaging in trade negotiations with Eastern countries and forging connections with regions like South America, South Asia, and the Global South . These moves could lead to the creation of a new global military order, redefining leadership beyond traditional powers .

What's truly fascinating is the idea that if global leaders, like the EU or BRICS nations, step up to lead these initiatives, it could be very disadvantageous for the United States . This is a counterintuitive insight because historically, when great powers pursue protectionist policies, other countries don't always unite effectively . But if a new form of global leadership emerges, demonstrating a different path, it could become a catalyst for completely transforming the global trade order as we know it . This means actively investing in research and development (R&D) and energy through defense budgets, as an alternative to direct payments or simply buying more weapons . This innovative approach, as hinted at by NATO's strategy of dedicating a portion of defense spending to R&D, allows for long-term, groundbreaking research, much like DARPA's role in developing AI, autonomous driving, and mRNA vaccines in the early 2000s . It's a strategic pivot that could redefine global influence, don't you think?